Saudi oil bomb for Iran
Saudi Arabia's refusal to cut oil production despite the price of crude bottoming out in the vicinity of $60 per barrel around mid-December serves to undercut Iran in a manner that the UN sanctions never could. With oil prices plummeting from a high of $115 in August, 2013 to its present price, Iran's ability to finance overseas military operations in the Mid-East are sure to take a hit. This is not the first time Saudi Arabia has used its overwhelming presence in Organisation of Petroleum Exporting Countries (OPEC) to send Iran into a freefall. Back in 1977, it increased production from 8 million barrels a day to 11.8 million barrels, forcing the market price to plummet. Iran was sent scurrying from the market and the effects on the Iranian economy were plain to see. Industrial output fell an estimated 50% and inflation rose to as high as 40%. The Iranian monarchy lost a lot of support amongst the middle class and paved the way, to a large extent, for the revolution in 1979.
Saudi Arabia and Iran have been locked in a strategic ideological battle over the Middle East long before the Ayatollahs came to power. It has everything to do with downsizing Iran that is viewed as a troublemaker for inciting Shiite aspirations for a greater say in the region. The timing to strike at the soft underbelly of an already depressed oil market during a global recession comes in very handy. It is not without reason that President Hassan Rohani has called the Saudi decision to keep pumping nearly 10 million barrels a day “treacherous” and “politically motivated.” Yet there is little Iran or countries like Russia, Venezuela, Brazil and Nigeria can do to counter the financial clout of the royal kingdom.
With about $765 billion in financial reserves, the Saudis can ride out a prolonged depressed oil market which will prove devastating to its neighbours, particularly Iran. The latter is already in a fix over its suspected-nuclear arms programme that has seen years of Western-backed sanctions. According to the International Monetary Fund, Iran requires oil price per barrel to hover around $150 to break even. With sub-$70 per barrel today, one can only imagine how Iranian policymakers are going to make ends meet. Riyadh's policy of using oil as a political weapon against Tehran is best exemplified in an article written in 2006 by Nawaf Obaid, a close associate of Prince Turki-al-Faisal (Ambassador to the US at the time) that appeared in Washington Post: “If Saudi Arabia boosted production and cut the price of oil in half…it would be devastating to Iran…[and] limit Tehran's ability to continue funnelling hundreds of millions each year to Shiite militias in Iraq and elsewhere.” Hence, this is a battle of supremacy between Sunnis and Shiites as viewed by Riyadh and oil remains the weapon of choice to reach that goal.
For all practical purposes, it is impossible for Saudi Arabia to ignore Iran as a major regional player. Given that 15% of its own citizens are Shia, it is a constant reminder for the Saudi royal family that, no matter how unlikely, this substantial population may rally to an Iranian call to arms. Indeed the Saudi paranoia over a possible Shiite takeover in Bahrain brought about troop deployment in that country in 2011. In that context, Saudi manipulation of OPEC prices in a bid to undercut the Tehran leadership, which it views as being dangerously close to obtaining nuclear arms, is perfectly acceptable. Undermining profits from oil proceeds is a tried-and-tested formula which the Saudis have used over the years with great effect as it has both the production capacity and deep pockets to weather the fallout from a price war.
The situation for Iran is getting dire. As expressed in an article in New York Post on December 14: “Tehran had learned to live with Western sanctions. But oil has been its lifeline. And to balance the books, oil has to sell between $135 and $140 dollars per barrel. Good luck with that, Supreme Leader! With the barrel price at barely 40% of Iran's requirement, the economy's going to haemorrhage. Iran's leaders will be under far greater pressure to compromise on the nuclear weapons -- unless we keep easing sanctions for nothing in return. This is the last chance for negotiations to bring results.”
To what extent Iran can weather the downturn and how long it can ignore the fall in revenues is anyone's guess. There is little doubt that President Rohani may have to introduce new austerity measures resulting in loss of thousands of jobs if the depression continues over the near term. However, hoping for massive social unrest manifesting in large street protests in Iran may be somewhat farfetched unless negotiations over its nuclear programme comes to a total standstill with the West.
The writer is Assistant Editor, The Daily Star.
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